Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc.

Supreme Court of Iowa · 1988 · Corporations

430 N.W.2d 447 (Iowa 1988)

Updated August 22, 2026

Corporationsfiduciary dutiesself-dealingshareholder derivative suitsclosely held corporationsduty of loyaltyinterested director transactionsmajority shareholder

Facts

Cookies was a closely held Iowa corporation whose sales expanded dramatically under an exclusive distribution arrangement with Lakes, a corporation owned by shareholder Duane Herrig. After Herrig acquired majority control of Cookies in 1982, the board he selected approved extensions and amendments to the distributorship, warehousing payments to Lakes, a royalty to Herrig for a taco sauce recipe he developed, and a consulting fee for Herrig's management services. Minority shareholders sued derivatively, claiming these self-dealing arrangements excessively compensated Herrig and his companies and reduced corporate profits. The district court found the arrangements benefited Cookies, were fair and reasonable, and involved no actionable nondisclosure.

Issue

When a director, officer, and majority shareholder causes the corporation to enter transactions with himself or his affiliated companies, what burden does he bear to justify those self-dealing transactions, and were Herrig's transactions valid under that standard? The court also considered whether Herrig owed additional disclosure duties to minority shareholders or the board concerning those transactions.

Rule

In Iowa, a director or controlling shareholder who engages in self-dealing bears the burden of proving the transaction was entered into in strict good faith, with honesty, and with fairness to the corporation. Iowa Code section 496A.34's alternatives for validating interested-director transactions prevent automatic voidability based solely on the conflict, but do not eliminate the common-law requirement that the fiduciary additionally establish good faith, honesty, and fairness. The business judgment rule does not govern once self-dealing is shown; the duty of loyalty supersedes the duty of care and shifts the burden to the interested fiduciary.

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Prairie Hearth Foods, a closely held corporation in Des Moines, appoints its majority shareholder, Nolan Pierce, as a director and president. Nolan causes Prairie Hearth to hire his own trucking company under a long-term delivery contract, and minority shareholders later bring a derivative suit alleging self-dealing.

Once the minority shareholders establish that Nolan stood on both sides of the delivery contract, which party bears the burden at trial, and what must be proved?

Explanation. When self-dealing is shown, the duty of loyalty supersedes the duty of care, and the burden shifts to the interested director or controlling shareholder. He must establish good faith, honesty, and fairness to the corporation. Board awareness alone is not enough, and the business judgment rule does not control after self-dealing is demonstrated. (Derived from Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc. (1988).)